How do you use your HELOC?

[drb111]

Just curious...We are in our late 30's. House is worth 800k. Have a 190k balance on fixed 30 yr 5.375. Also have a 200k HELOC with very low balance at prime minus .76. Financial health is in very good shape. No debt other than the ones mentioned here. Just want to make sure I'm not missing anything by have all of this "equity" and not using it...been lurking for a month or so. good forum...

 

[Nords]

Welcome to the board, drb.

We just use our HELOC for "emergency cash"-- the time it takes an EFT to get from our brokerage account to the credit union. It's especially convenient to write a HELOC check if we're paying with a cashier's check or need a chunk of cash from the credit union. Sometimes the EFT is done before the cashier's check is even cashed, and last time we withdrew cash it took the credit union five business days to catch up with its own HELOC.

As for "unused equity", search the threads for keywords like "pay off" and "mortgage"...

 

[W2R]

I have had my HELOC for two or three years by now, and I haven't used it at all. I originally got it to use as my emergency fund.

During the Katrina evacuation, it was great to know that I had a big wad of money available to me even though I didn't need it at that time. I was one of the more fortunate New Orleanians. Had my home been badly damaged or destroyed, or had I lost my job, my HELOC would have been a life saver.

 

[drb111]

thx Nords...I have read some of types of threads you are referring to. I see both sides of the "pay off the mortgage or not" threads. I have seen some threads where people will tap their home equity and buy index funds for the long haul. Presumably with lower, longer term fixed rates with the assumption the "S&P will return 10% over time" I don't think that is for me...We will most likely use our HELOC as emergency $$ as well. Just curious what others are doing...

 

[Enuff2Eat]

can someone tell me where is a good place to look for a good rate heloc? we currently have a line of 200k and using 90k right now paying 8% and would like to find something better.

enuff

 

[thefed]

I used mine to buy an investment. I bought a house for $12k, fixed it up NICE for another $10k...and rent it for 650/month.

Then I got a HELOC on that house and bought one for $24k...

I put 6k into it and rent it for 625/month


Then I got a HELOC on that.....and I stopped to catch my breath.....

But then I had the notion to start another business, Lawn Care, and have pulled about 10k to fund it. We have 30k of work lined up so it'll be paid back fast....


The equity I had in my primary residence was, in my eyes, an opportunity....it seemed like a waste just being there....I suppose I like to take a bit of risk, so building equity and not trying to compound my wealth seemed foolish.

A HELOC is money on the table... and I hate leaving opportunities and money on the table.

It all depends though on what kind of person you are, your tolerance for risk, and most importantly, your desires.

 

[Linney]

We got our HELOC six years ago to finance a new car when our older car died quite suddenly.

Today, HELOC is paid off (house is paid off too). HELOC is being maintained to provide a source for major emergencies. With house and HELOC paid off, we have a lot of extra cash each month which gets transferred to Vanguard and invested in our taxable account. There is enough there now to pay cash for our next car. Everything in that taxable account above-and-beyond big ticket purchases (like next replacement car in about 4 year) is earmarked for bridging us between early retirement and eligibility for IRA/401k withdrawals.

 

[Cattusbabe]

We use ours mainly as an emergency fund. We do have the usual six months of expenses saved in case of small emergencies and have the HELOC should all hell break loose. We live on the interest generated from our portfolio and do not ever want to be in the position to have to sell off stock or bonds to get us out of a jam. Belts and suspenders.

 

[brewer12345]

I use it as a safety net and have never tapped it in 2+ years of having one.

 

[FinanceDude]

I think a HELOC is an important part of a person's financial life. I know a few folks that have had their financial life "saved" by a HELOC they could tap.........

However, once the HELOC is "tapped", it becomes a "HEL" (Home Equity Loan")..........so be careful you don't go to "HEL" too quickly...........

 

[KB]

Mine is a safety net also. I've had it for about 2 years, and have not tapped into it.
I debated long and hard before opening up a LOC and having a lien on my paid off home.

The safety net won.

 

[rw86347]

People always talk about "equity" almost like it is cash that needs to be used. You want equity. It is a good thing.

I personally like to avoid borrowing money. I like to loan money. I want interest payments, I don't like making interest payments.

IMHO, having an emergency rather than a HELOC, is a sign of a healthy financial state. When you own an emergency fund you *make* 4% annually, when you borrow money you pay 0-5% annually.

Making money is simple:
- Live below your means.
- Own everything outright.
- Lend to others and/or own appreciating assets (notes, equity ...)


For me and my family, I would tell the bank sales person to take a long walk on a short peer.

rw

 

[brewer12345]

IMHO, having an emergency rather than a HELOC, is a sign of a healthy financial state. When you own an emergency fund you *make* 4% annually, when you borrow money you pay 0-5% annually.

Making money is simple:
- Live below your means.
- Own everything outright.
- Lend to others and/or own appreciating assets (notes, equity ...)


For me and my family, I would tell the bank sales person to take a long walk on a short peer.

rw

Personally, I view it as just another layer of defenses against bad things happening that demand liquidity. First layer is loose cash laying around. Second is some CDs and T bills laid aside especially for this sort of thing. Third layer is a pile of 0% credit card cash advance money that I usually have sitting in a money market and T bills. Fourth is the HELOC. Fifth is sales of or borrowing against taxable investment portfolio. With all this, it would take a financial disaster of very large proportions before I were arsed for cash.

 

[Darryl]

Paid off house can be a good thing. Wouldn't say you're not using the equity if your living in it.
Everybody does have their own risk tolerance, for me it was paying off the HELOC we used to use as emergency fund. As previously noted ours went from a HELOC to a HEL for a little while.
Now it's closed and all those other layers are in place.

 

[Financial Jungle Guy]

I used my HELOC to buy dividend paying stocks. Dividends are either tax-free or close to it for most Canadians, and interests on HELOC are tax-deductible. Between the two, your after-tax cash flow should only be slightly negative during the first year or two. After a few years of dividend increases, it should turn into a positive and rising cash flow portfolio for many years to come.

It doesn't make sense to wait until your house is paid off before investing in dividend stocks for the same reason that it doesn't make sense to wait until you have enough cash to buy your home outright.

Buying dividend stocks with cash may seem safe, but it's killing your time. The longer you wait, the more time you'll lose. Investing while you young is safe, because you have time horizon on your side. If you're 50 year old by the time you pay off your mortgage, you'll have only a few years left before "early retirement". That is when it's too risky to buy stocks.

 

[rw86347]

I used my HELOC to buy dividend paying stocks. Dividends are either tax-free or close to it for most Canadians, and interests on HELOC are tax-deductible. Between the two, your after-tax cash flow should only be slightly negative during the first year or two. After a few years of dividend increases, it should turn into a positive and rising cash flow portfolio for many years to come.

It doesn't make sense to wait until your house is paid off before investing in dividend stocks for the same reason that it doesn't make sense to wait until you have enough cash to buy your home outright.

Buying dividend stocks with cash may seem safe, but it's killing your time. The longer you wait, the more time you'll lose. Investing while you young is safe, because you have time horizon on your side. If you're 50 year old by the time you pay off your mortgage, you'll have only a few years left before "early retirement". That is when it's too risky to buy stocks.

Buying late in life is bad ... I agree

Buy stocks with a loan is very risky. Rather we should live a simple, humble life in a an inexpensive home. My house will take me 5 years to pay for. That allows me to take 25 years worth of mortgage payments and place those payments into investments. That is low risk and takes advantage of time.

Paying others is bad. Others paying me is good.

 

[ADJ]

I used mine to buy an investment. I bought a house for $12k, fixed it up NICE for another $10k...and rent it for 650/month.

What! That's unbelievable. Which part of the country havw such a cheap house with this rent roll?

 

[CybrMike]

What! That's unbelievable. Which part of the country havw such a cheap house with this rent roll?

Second that, I'm in Indiana and even in the ghetto couldn't get houses for those prices. Even if I could I probably wouldn't want to. Got to collect rent weekly in the ghetto.

 

[CybrMike]

I took my $129K HELOC and bought some land down south from where I live. Plan to build a cabin there one day......one day. For now, its just non-income producing land. But, hey, its got commercial potential, so ya never know, could be the best investment I've made this year. Probably not though.

 

[Financial Jungle Guy]

Buy stocks with a loan is very risky.

Can you elaborate? Which one is risky? The stocks, the loan or both?

I figure it cannot be the stocks, since you are prepared to buy them in the future. The stock market doesn’t become safer a couple of decades from now. In fact, it’s safer to buy them now with time is on your side.

It can’t be the loan either, if the dividends cover the after-tax interests. Basically you let dividend increases propel your retirement cash flow. The earlier you start, the more time you have to compound.

Don't get me wrong. I'm not trying to persuade people to leverage if they don't feel comfortable.

 

[rw86347]

Can you elaborate? Which one is risky? The stocks, the loan or both?

I figure it cannot be the stocks, since you are prepared to buy them in the future. The stock market doesn’t become safer a couple of decades from now. In fact, it’s safer to buy them now with time is on your side.

It can’t be the loan either, if the dividends cover the after-tax interests. Basically you let dividend increases propel your retirement cash flow. The earlier you start, the more time you have to compound.

Don't get me wrong. I'm not trying to persuade people to leverage if they don't feel comfortable.

Loosing cash is sad. Loosing loaned money is a disaster. I have learned the hard way that borrowing for an investment exponentially increases risk. If your math is off more than 10% it will prevent you from future saving. The risk isn't worth it, just use plain old cash.

You are much better off lowering you debt load and investing with pure cash. Which is really at the heart of the LBYM concept.

 

[Financial Jungle Guy]

Based on your reply, I think we're talking about different frame of minds. I'm looking at it from a cash flow point of view, and how it'll increase over time to fund my retirement. If the underlaying securities drop 10%, it doesn't affect cash flow. It may be sad to some people, but it's pure psychological and can be corrected through education. If you're going invest $10k each year for the next 20 years to buy dividend paying stocks, having the stocks correct 10% means you can buy even more shares next time, and increase your cash flow.

 

[Nords]

It may be sad to some people, but it's pure psychological and can be corrected through education.

(*snork*) That's pretty funny!

I don't think an emotional preference can be corrected by quoting research, statistics, or data. Otherwise we'd all be at our ideal weights, live in harmony with the environment, be happily engaged in our avocations, and be invested in low-cost index funds with 0% turnover...

One reason that we've chosen to leverage our portfolio with a mortgage is because we're more afraid of losing to inflation than we are of losing our home. When enough factors line up in favor of one's emotional bias then it's easier to go ahead with the decision. When an emotional bias is still against the facts, though, it's almost impossible to change.

 

[Financial Jungle Guy]

I could not have said it better.

It's my fault for not being clear. I was referring to behaviour science, which has been documented extensively. The more we now how our brain works, the equipped we're in keeping our emotions in check.

It's my belief that investors make money with tough mentalities, not smarts.

 

[JustCurious]

My mortgage balance is currently about 36% of my home's market value, and I have a 15 year fixed at 5.25 which I am paying extra on each payment, and I expect to have it paid off in about 5-6 years. I am very opposed to having debt, and I am even more strongly opposed to having debt which is collateralized by my home. I.E., if I don't pay the debt, they can take my home. So for me, no HELOC of any kind, thank you very much.